Hong Kong SFC responds to Evergrande's HK$1 billion audit settlement dispute: it does not affect the order of creditor repayment.

On September 24, Dai Lin, Executive Director of the Enforcement Division of the Hong Kong Securities and Futures Commission, said at the 10th Annual Asian Company and Securities Law Seminar that the HK$1 billion settlement reached between the SFC and PwC Hong Kong over EVERGRANDE Group's audit failures will not change the repayment order of Evergrande's creditors. The funds are to be paid by PwC Hong Kong and are not Evergrande assets, nor do they fall within the liquidation proceedings. Therefore, the "bypassed statutory priority order" alleged by the liquidators has not been triggered. The liquidators filed an application for judicial review on June 12, seeking to revoke the settlement and prohibit implementation of the agreement before their claims are finally determined. The Hong Kong High Court is expected to rule around the end of October. Dai Lin said that Evergrande inflated revenue for many years before its collapse, and its financial statements caused investors to underestimate risk. When auditing Evergrande's 2019 and 2020 financial statements, PwC Hong Kong failed to maintain independence and sufficient professional skepticism, failed to effectively verify property construction and delivery, and acquiesced to Evergrande management's manipulation of audit samples and site visits, while failing to adequately verify the authenticity of supporting documents. The failure of audit gatekeeping caused losses to minority shareholders. The Hong Kong SFC could originally have sought compensation through the tribunal or the courts, but given the lengthy litigation and uncertain outcome, it chose to settle with PwC Hong Kong. The latter, without admitting liability, agreed to pay HK$1 billion to compensate independent minority shareholders and to take other remedial measures; after performance, the SFC will take no further action against it. Dai Lin said this is an innovative approach in Hong Kong, and although it has been challenged by the liquidators, regulatory decisions should still be based on the public interest. He stressed that settlements without admission of liability are not applicable to disciplinary proceedings against licensed corporations, because when the SFC initiates such proceedings it has already determined that violations exist. For third parties such as auditors, whether to adopt such settlements depends on the facts of the case, the evidence, and the practical considerations of both parties.